Capitol Hill’s Stock Trading: What the Academic Research Concludes

In light of the Wall Street Journal’s Page One article today about Congressional aides profiting from timely stock trades in companies for which their bosses wrote laws, Deal Journal took a look back at two pieces of research into the fortuitously good stock-trading skills on Capitol Hill.

First, we tracked down Alan J. Ziobrowski, a professor at George State University’s business school who co-wrote a 2004 study that found U.S. senators’ stock picks beat the market by an average of about 12 percentage points a year during a stretch of the 1990s. Over the same period, U.S. households underperformed the market by 1.4 percentage points a year on average.

The study’s authors suggested the performance was so good, senators likely benefitted from access to inside information, such as when a company was going to be awarded a government contract, or that a pharmaceutical treatment was about to be rejected by the FDA.

Associated Press

Since his study, which drew wide press attention, Ziobrowski said he has heard from other researchers that the trading performance of members of Congress no longer is wildly better than the public’s stock record. He said it may be a sign that the 2004 study scared straight some Capitol Hill types.

“I’m very proud of that for that reason alone,” Ziobrowski said. “No one went to jail, but that’s ok. It was well worth doing the paper.”

It also is now much easier to track stock holdings and trading by members of Congress. Ziobrowski said he and his co-authors took years to sift through what were then paper records of Congressional stock trading, and enter them into computer databases. Now, watchdogs like the Center for Responsive Politics have searchable databases of lawmakers’ financial disclosures.

Today’s Journal article included a denial from the congressional aides–only the top rungs of which have to disclose their financial information– that they may have traded on inside information their bosses perhaps now are too spooked to take advantage of.

That brings us to a second article, by UCLA corporate-law professor Stephen Bainbridge, looking into whether and how insider-trading laws apply to members of Congress and their staff. Members of Congress, as the Journal and Bainbridge write, aren’t covered by insider-trading laws.

Bainbridge says, however, that their staff members could be found to be illegally trading stocks because of a Supreme Court case, U.S. v. O’Hagan, which found employees who misappropriate confidential information from their jobs are defrauding their employers and clients. That fraud is enough to kick in insider-trading liability. In short, Bainbridge says Capitol Hill staffers don’t have the same immunity from prosecution that their bosses have.

As the Journal points out, a piece of legislation called the STOCK Act proposes to bar members of Congress from trading securities based on nonpublic information they obtain. The bill so far has languished.

“Is it really surprising that this has gotten stuck?” Bainbridge said in an interview. “Until there is a very big scandal, it’s one of those classic good government reforms that will go nowhere.”

Comments (2 of 2)

why is everyone ok with the fact that there are criminals creating laws.???
Wake up America.

10:18 am October 12, 2010

Milwaukee wrote :

Instead of a market index fund, how about an capital index fund. Or a capitol index fund, Shares acquired to reflect holdings of members of Congress and their staffs. Just copy cat the ones who know. Be on the cutting edge of crony capitalism. Which capit*l should be used?

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